December 2, 2021

Five Things to Know About Perfect Competition in the Market

Perfect Competition in the Market

Introduction

A perfect competition market is a market where completion is at its highest level. According to the Neo-classical school of thought, such market produces the best outcomes. A market is always a perfectly competitive one when it is acting as a price taker market. The ongoing market forces enable a firm in maintaining equilibrium at a given price. It can sell as much as it can at a given price. However, it is important to note that it cannot sell even a single commodity at a higher price. In this regard, a market consists of many small firms that have zero control over market pricing. The most common example of such markets is the stock market. Agricultural markets like jute, cotton, and wheat are other examples of this market. There are several conditions for perfect competition in the market. If anyone fails to fulfil them, it won’t be a perfectly competitive market.

There are several pre-conditions for a perfect competition market. Experts of an assignment writing service have given below a few of the main assumptions in this regard. Let’s discuss them in detail.

  • Homogeneous Products

In any industry, there are multiple firms that are competing with the other organizations. These firms usually produce several products that are the same in nature and quality. The products are homogenous as well. In this regard, we can take the example of carrots. There are two farmers producing carrots. The carrots of farmer A are indistinguishable from farmer B’s carrots. But different car models of the automobile sector are heterogeneous products. It is one of the major assumptions for perfect competition in the market. It is important for all the available firms in the market to sell identical products. While selling identical products, they will act as price takers. Apart from this, the available market forces have zero influence on prices. Firms cannot sell above the set price, but they won’t sell below that price either. If firms try to do so, they will disturb the equilibrium price.

  • Multiple Buyers and Sellers

A large number of buyers and sellers is another assumption of perfect competition. This assumption has a direct link with the first assumption. If a firm wants to act as a price taker, then there must be a larger number of buyers and sellers. If there is a single firm in the market, then it is possible that it will have a great influence over the prices. This way, a single firm can sell a little more or a little less to control the prices. Prices will reflect the demand and supply forces of the market under this assumption. At the equilibrium price, the firms will earn enough profit. It will help them stay in the competition. If a firm tries to earn more profit by selling above the equilibrium price, then new firms will enter the market. Once new companies enter the market, they will sell at the set price. This way, they will get more customers and drive profits down for that firm.

  • Perfect Information

Perfect Competition in the Market 1Perfect information is another key feature of perfect competition in the market. It will help buyers and sellers in having complete knowledge of the price. Apart from this, they will have a perfect knowledge of cost functions. With the help of perfect information, buyers and sellers are in close contact with each other. It means they know how a perfectly competitive market is working. Apart from this, they also know for how much price a commodity is being sold in different parts of the market. There is a complete knowledge of the prices at which transactions are taking place. A complete piece of information helps a buyer know the prices at which a seller is willing to sell. Perfect information helps them know the preferences of each other. This way, a perfect completion in the market works, fulfilling the needs of sellers.

  • Free Entry and Exit

Research by an assignment help firm shows that a perfectly competitive market adopts a completely different approach in the long run. It is important to know that in the long run, all inputs are variables. A firm has the free choice of entering or exiting the market. Apart from this, a firm can adjust its factor of production. This way, firms adjust their long-run equilibrium. There are no other market forces that can cause a problem for a firm to enter the market. The only possible hindrance is a large number of sellers if there is free entry into the market. When a new firm enters the market, it can start its production. Once there is a large of numbers of sellers via free entry, then there will be a chance of less profit earning.

  • Profit Maximization

Profit maximization is the key rule of any firm under perfect competition. If a firm is willing to earn more profit, it has to set marginal revenue equal to marginal cost. Marginal revenue is the slope of the revenue curve. It is also equal to the demand and price curve. The profit can be positive, zero, or negative. If price is greater than the average total cost or ATC, then the firm is making a profit. When it is below the ATC, the firm is making a loss. So, it is always a top priority of the firm to make a profit while minimizing its ATC.

Conclusion

A perfect competition leads a market to its highest level. Such markets help the consumers to make the best choices. Under perfect competition, firms are selling homogenous products. It always helps the consumer as it leads to low prices and high quality of goods. There will be an equilibrium price that will help the market to meet the demand. Under perfect competition, an economy will operate at the maximum level. It will meet the surpluses and any shortages. Under perfect completion, a producer will produce the quality of products. It will help him stay in the business. The producer will act as a price taker as it has no influence over the prices. With perfect information, a consumer will have complete knowledge of the market.

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